2013 Trustees Report:
by Dale Coberly
2013 Trustees Report:
Social Security is Running Out
of Worthless IOU’s!
9.6 Trillion Dollar Unfunded Deficit!
ho hum
I did not take a hard look at the 2013 Trustees Report when it came out last Spring because I thought I knew pretty much what it would say, and what it would amount to. And I really have better things to do than keep up with the latest wild guesses presented in hysterical and misleading form.
Subsequently CBO came out with its own report projecting a 9.6 Trillion Dollar deficit, and I tried to answer some hysterical letters from the usual commenter on AB. At that time I did not know the timing of the CBO’s increased deficits, so I was unable to give a precise analysis of what they amounted to. Since then I was able to go back to the 2013 Trustees Report which also projected a 9.6 Trillion Dollar deficit over 75 years. But it gave details that I could use to calculate exactly what this means in terms of “how much is it going to cost “me” over a time period I can make sense of.
The answer turns out to be…. wait for it… about eighty cents per week, in today’s terms, per year, starting in 2018, repeated each year for 15 years to 2033. Then it would only need to be repeated an average of once every six years… this amounts to an average increase in the tax of 13 cents per week per year…for forty five years… with the last increase occurring in 2078, which brings the tax rate up to 2.2% higher than it is today (for each the worker and the employer), which is enough to fund Social Security forward into “the infinite horizon” as far as the eye can see.
People who object… much less are hysterical… about a 2.2% increase in their payroll tax over the next 65 years are not thinking. They are not thinking that they will get this money back with interest. It is the money THEY will need to pay for at least a basic retirement “if all else fails.” And they are not thinking that this amounts to a raise in the tax of about 18 dollars a week while their incomes will be going up over one thousand dollars per week… in real dollars. The “interest” comes from the fact that under pay as you go, you get paid out of a total tax that is in real dollars about twice what it was when you paid in… all due to the growth in the economy. The Big LIars like to confuse people about that. They
pretend that “the old are getting more than they paid in, paid for by “the young.” They don’t bother to remind you that “the young” will become “the old” and get the same good deal… forever.
I can’t do much about people who choose to be hysterical, but the rest of you might be better able to resist the scare-talk by remembering it means eighty cents per week. Or even 17 dollars per week out of a thousand dollar per week raise. AND you will get the money back, with interest, when you need it most.
It should be noted that this is not the only way to pay for your expected greater needs when you are too old to work. But it is the fairest way I can think of: You pay for what you will need yourself. And those who will get the most pay the most. That is because by phasing in the increase gradually, those with the highest incomes and longest life expectancies (both of these are also “phasing in” gradually) will pay the most. A worker today with forty years to go to retirement would see only an ultimate increase of 1.7%… which would be an AVERAGE increase of 0.8% over the forty years.
But this is what retirement is going to cost you however you pay for it. As an example, the CBO report says that an “immediate and permanent” increase in the tax of 3.4% would be needed to pay for the increased costs. This is not quite true. But in any case the difference between their “immediate 3.4%” (combined) and my “4.4% after 65 years” (combined) is made up for by the interest that immediate 3.4% will be earning before it is needed. Interest that amounts to about 1% of payroll… which you would pay for hidden in your income tax.
Even if you relied on the stock market… and were not left broke at the worst possible time… the same amount of money would have to be withdrawn from the economy (lower wages or higher prices) to pay your dividends, or profits on stocks you sell. And if you think you can “tax the rich” to make them pay for your retirement, guess again. The rich can pass through their tax costs onto their customers and employees. And all you would have done is exchanged the guarantee of Social Security for your chances in law of the jungle economy which the rich favor.. because their chances are better than yours. And, if you try to make “the rich pay,” or even if you succeed for awhile, those rich will not rest until they have destroyed Social Security entirely… leaving you to take your chances with the law of the jungle.
An interesting fact, pointed out by Bruce Webb, is that paying for the extra costs of Social Security by gradually raising the tax eliminates the need for Congress to repay the Trust Fund. The Trust Fund balance just lies there on paper without needing any actual cash except for interest payments that would amount to about one quarter of one percent of total “adjusted gross income” per year. But be warned, “the rich” don’t like to pay interest even on money they borrowed, even if it means never having to repay the principle (or even all of the interest), so they will keep finding ways to make
this sound like an unfair burden on the young.
It seems to be easier for the Big Liars to come up with new hysterical ways to present the costs of Social Security, than it is for me to deconstruct them for the Truth. But I don’t see any reasonable scenario that will change the fact that you will always be much better off with Social Security than without it. And that you can always pay for it yourself at a cost that is reasonable for what you get: a guaranteed ability to retire when you can’t work, can’t find work, or … because you have paid for it yourself… just want to do something else with the rest of your life than work for the boss.
And try to keep in mind that while Social Security provides “security” at a reasonable cost for average workers, and even the higher income wage earners, it provides truly life saving insurance for those who have bad luck… including disability, death with dependents, or just never earning enough to have saved enough to retire. For these latter, the “return on investment” can be something like ten percent “real” interest… which is way beyond anything they could have gotten “in the market.” And you never know when you might become one of them.
Hi Dale, An interesting thing is going on with the 2014 budget and the federal workforce pension fund. It will be interesting to watch. For some reason Ryan is being allowed to do budgeting with Patty Murray at his side.
Anyway, they are putting in some “cost savings” items that don’t seem all that cost saving but, rather, seem to use workers as sacrifices to the Gods (according to Federal Times). Anyway, the proposals include a 2% cost shift from agency to employee for pension contributions which is essentially a reduction in the personnel budget since the feds pay pension contributions up front now. Also, a shift to C-CPI is included and they are saying that most Americans agree that senior experience C-CPI type inflation, not the current CPI. This is interesting since most federal workers actually don’t get CPI increases going forward. They already get CPI-1% with a 2% floor. There was more but I don’t recall it all. It had something to do with making it harder for workers to retire early.
Any way, looks like the slippery slope is starting but with a new element. Do you think they will eventually shift more employer contribution to the worker for SS too? (Maybe through a tax increase only on the worker?) As well as CPI changes. You know, apply to smaller group and, after everyone gets really happy about it, apply it to them too since they like it so much?
http://www.federaltimes.com/article/20131204/BENEFITS01/312040015/Bill-Cut-federal-benefits-help-avert-new-defense-sequester
Dale:
You should look at how they are calculating the NPV to arrive at the $9.6 Trillion. For example, if they are utilizing similar discount rates as what businesses would use (FMV techniques), this over values (increases) the deficit.
Again as you know the $9.6 trillion over 75 years is a scare tactic meant to arouse people’s anxiety. Biggs and Keating are making big on this. Who the hell knows what 10 years is going to bring. If the PPACA methodology actually works and we are seeing some of this now in a slowing of medical growth (and no it is not all due to a recessional economy) as hospitals and the healthcare industry actually prepared for implementation.
” it provides truly life saving insurance for those who have bad luck… including disability, death with dependents …”
I would be interested in knowing if anyone has ever put(or can put) a real value on this part of SS.
E Michael
if you mean money value, i am sure there are folks who would try. but up to the point where “we can’t afford it”, meaning “it hurts me more than i am willing to pay” and “i don’t expect anyone else to pay it for me” and we are willing to face the moral implications of that, i don’t think money is the best way to measure life.
i don’t try to do that here. i don’t even try to predict what SS will “cost.” I only try to show what the Trustees say it will cost if you do the arithmetic to show what their numbers actually mean,
and no one, NO one, has ever shown a better way to insure a whole nation against the all but certain costs of getting too old to work. there are a few people who claim to show “the market” works better, but they are not honest and their claims don’t hold up under any serious examination.
Coberly,
I was not clear.
In no way am I attacking SS, quite the opposite. In many discussions with conservatives(living in Scottsdale means almost all of my discussions), I am bombarded with their perception that SS is not a good deal with the usual “the market would be better for everyone” meme.
In defending SS, I would like to know what the value of the disability and survivors benefits actually are. I have tried to come up with a value from the costs of private disability insurance, but there is no private insurance policy that comes close to SS disability insurance in terms of length of policy, etc.
I was just wondering if someone a lot smarter than me could figure it out, so I could use it to bash a conservative over the head with instead of using my 9 iron.
EMichael
I am not smarter than you. I bet you could dig out the answer yourself. And then you could tell the rest of us.
I didn’t think you were being hostile. And I hope I don’t sound hostile either.
call up some insurance companies. get them to tell you what they charge and what you get. read the fine print… very closely… watch out for inflation adjustments.
then ask SS the same questions. if you can’t find someone at SS, i may know someone.
but the answer is still “it’s not the money.” the very poor don’t buy insurance because they don’t think they can afford it… and they can’t. by putting everyone into the insurance pool, those of us with more, simply by paying a premium equal to our own risks, create the possibility for the poor, to get the same level of insurance at a lower cost (same percent of their wages), and because it is “taxed” they don’t have to remember to do it, or agonize about paying for it. that “tax” thing is what drives the Right crazy, but it is what sensible people realize sooner or later is a necessary fact of life.
oh, you might ask your right wing friends to give you the details of THEIR argument. i am reasonably sure that when they are forced to give details they will either turn out to not know what they are talking about, or they will try to fool you with made up numbers…. and skipping the hard parts.
As you say, we will get our money back with interest, but at what interest rate, what will be our rate of return?
Constantly raising the tax rate of SS just reinforces the notion that SS is a Ponzi scheme that cannot continue to pay full benefits without constant increases in the tax rate. Why not simply bite the bullet and maintain the SS tax rate where it is now and then pay out over time only what the system can afford to pay out after spending down the accumulated IOUs in the Trust Fund?
E Michael–Disability insurance is quite expensive and stops when SS benefits start. It’s not an automatic pay-off and doesn’t last for the life of the recipient. You also have to meet their requirements which are quite similar to SSA’s. You just don’t call them up and start the checks at will.
That said, few DIB claimants have life insurance or any kind of insurance beyond unemployment and workers’ compensation. They just can’t afford it. Social Security is all there is for a growing number of workers in our society. The top 10 percent or so probably don’t need SS to survive. Still, there is no other type of investment available at any price that does the same thing with absolute security. NancyO
Michael
you are not reading carefully, and you are not thinking.
The 4.4% (combined) raise in the tax rate will “fund” Social Security forever… or at least as far as the eye can see… beyond the 75 year actuarial window and into that infinite horizon.
second, it seems a little stupid to “fix” the “tax” rate… really it’s a savings rate… what it will cost you to live after you can no longer work…. so people can save an extra eighty cents per week while they are working, and starve in the streets when they can no longer work.
Hanesbury
the effective interest rate has been about 3% real, on average, for some time. it looks as if the effective interest rate in the future might be as low as 2% real. What is your effective interest rate today?
And, as I try to get people to understand, the “interest” for the “average worker” is not the point. SS is insurance, and those who need the insurance are going to get an effective interest a hell of a lot higher than the 2%… think 10% without even any catastrophes happening to them early in life.
the reason the effective interest rate will be lower in future is because “today’s young” are not expected to do as well as their grandparents in growing the economy. that might be their fault… they elect politicians that make laws that make it easier for the criminal rich to exploit them.
SS gets its effective interest from the growth in the economy.
i am sorry that people who have had an “education in basic economics” do not understand how this works.
interest rates and unemployment rates rise and fall. once you lose Social Security.. as a worker paid insurance and savings plan, protected by, but not paid for by, the government from inflation and market losses… it will be gone forever. mostly because people will not be smart enough to know how to bring it back. that took the genius of Roosevelt.
the hansberry plan
amounts to this: you have been budgeting 25% of your income for groceries. then you hear that the price of groceries is going to go up. so you decide you will have to give the children less to eat so that you can stay within your budget… as opposed to say, spending 27% of your income on groceries, and buying one less new car over your lifetime. after all, it’s the “percent” that counts. Right?
krugman is talking about negative interest rates being the norm for the future. i think he is wrong, and wrong headed. but if we end up going that way, it would mean that Social Security would cost a little more… maybe about one percent more (combined). what then? do we throw ourselves on the floor and kick our feet and say we won’t pay?
and then what? how are you going to pay for your retirement… if that negative interest rate economy won’t let you get rich on the stock market or allow you to save faster than inflation eats up you savings?
you are going to need Social Security more than ever.
and if it costs a little more… well other generations have had hard times too. as far as i know this is the first time a generation has declared that if it’s not going to be as rich as it wants to be it will just go to the race track and get drunk. because “it’s so unfair.”
how about instead we make a rational guess about how much it is going to cost us to live… and live in retirement, and do what we have to do to pay for it. allowing for a rational balance between what we “need now” and what we are going to need then.
as far as i can tell the cost of Social Security will never be so high that we will have less than our grandparents… so what’s so bad about being richer than they were and still be able to retire?
you can still “invest” in the stock market, or your own enterprises, with the money you have left over after paying for your Social Security. and if you can’t get rich without using your Social Security money… you aren’t smart enough to get rich in the first place.
Michael H lets try starting from the other end.
Shoud future seniors, disabled, and survivors have the same proportionate share of national income as today? On a per capita share of GDP? Or not? And if not why not?
Maybe allowing each individual participant in Social Security in 2050 have the same share of national income as today is ‘unsustainable’ because of ‘crowding out’. But in what sense is it ‘unfair’ and still less ‘intergenerational theft’.?
Currently Social Security benefits eqaul just under 5% of total national income to support the largest proportion of income for 17% of the population. Under intermediate projections that share of national income would rise to just over 6% to support 25% of the population. That is on a per capita share of national income looks to be pretty steady state.
Now you could come up with reasons for arguing why the burden of the elderly, the widows and the orphans was ‘unsustainable’, though I would like to see numbers. But is very hard to see why devoting the same share of national income to these same categories of people is ipso fact ‘intergenerational theft’. So absent the specific argument about actual crowding out the fact that we currently devote 4.9% of national income to support 16% of the population but will be called upon to devote 6.2% of it to support 25% of that future population doesn’t seem like some ethical outrage. I mean there may be some reasons why the living standard of future workers increases even as the living standard of future retirees remains stagnant. But outside the fever mind of Alan Simpson that doesn’t mean retirees in Lexus’s heading to the Country Club to pay greens fees taking the bread out of the mouths of their grandchildren.
Social Security’s benefit formula is set so that all generations have a ultimate standard of living that rises at pretty much the same rate. So Grannies don’t get rich at the cost of Grandkids. On the other hand both end up with smartphones, or at least the same ability to purchase mac and cheese, depending on how the economy goes in the meantime. But it isn’t ‘theft’. And it is only partially ‘Honor Thy Father and Thy Mother’, though that is important. It is about sharing the good times along with the bad.
look,
to the extent that “the old” get more than they paid in, there is such a thing as the time value of money. you don’t generally scream “stop theif” when you take more money out of your savings account than you put in.
the effective interest that Social Security pays is a consequence of the “growth in the economy” which happens WHILE THE EVENTUAL RETIREE IS WORKING AND CONTRIBUTING TO THAT GROWTH.
to the extent that future workers will not get quite so much “interest” from SS… and that’s why the tax has to go up, to pay for what you will need without the help of quite so much interest… it will be because those workers…. today’s “young”… fail to grow the economy, or at least the workers’ share of it.
so before you go around moaning that the “old” got a better deal than you got… in spite of the draft and the war and the great depression…LOOK TO YOURSELVES. you might be able to take advantage of the “infrastructure” “the old” left to you and create your own “growth.”
but you’ll need to elect politicians who are not lying to you about “generational theft” and “we can’t afford it.”
Having to raise the SS rate is not a recognition that it is a Ponzi scheme. It is a recognization that the cost of retirement has increased more rapidly than wages.
jerry critter
exactly right.
but it takes the Big Lie machine to convince “young people” that this is a bad deal. They think they are losing a huge amount of money, while the old are living on money they “stole” from the young.
the fact is that the 2% increase in SS cost mentioned here, is not a “loss.” it is better understood as “instead of a 100% increase in income, you are only going to get a 98% increase in income now, and get the 2% back about twice over when you retire.
you’d have to be stupid or insane to complain about that.
unfortunately… the Big Liars are counting on that.